SNDK Q1 earnings analysis 26-apr-07 AMC

consensus: EPS 0.19/0.10 Rev 761.81

Gapping Analysis

Q4 30 Jan 07 AMC – beat $0.15 _____ – 3.50 + 0.85 (weak guidance)
Q3 19 Oct 06 AMC – beat $0.04 _____ – 9.80 – 2.75
Q2 24 Jul 06 AMC – beat $0.14 ______ + 4.40 – 0.50
Q1 20 Apr 06 AMC – in-line _________ – 3.20 – 2.30

.

Risk/ Reward Analysis

.
Info

25 Apr 07 – Briefing earnings preview
Deutsche Bank expecting in-line Q1 (after -ve pre-announcement in Feb).
• NAND prices rebounded after hitting bottom, so Q2 guidance could be better then expected, but would look past it.
• DRAM prices & margins dropping for last 2 mths, so likely NAND dd will ↑
• relatively cautious on SNDK

Oppenheimer believes SNDK’s qtr could have downside to consensus as retail sell through weak for most of the Mar qtr.
• investor pessimism Q1 questionable S/T demand
• Q2 has improved outlook, with back to school build.
• believe investors positioning for 2H07, recc buy on weakness

Amtech expects in-line qtr
• believe investors already expect sluggish Q1 results and anticipate 2H07 recovery in NAND pricing.
• believe investors confident Hynix royalty deal will provide a boost to IP rev of $50-100M/yr, with most of this flowing to the bottom-line given the inherent high-margin nature of this segment.

25 Apr 07 – SanDisk, Qimonda to Make Phone Chips
SNDK and Qimonda will partner to make a multiple chip pkg for hps. The multichip pkgs will integrate SNDK flash memory and Qimonda DRAM. Samples expected in 2H07, mass pdn anticipated to begin end 07.
>> so what is this chip pkg about? For SIM cards? How does that impact existing SIM cards?
>> material effect on earnings? I think not.

16 Apr 07 – Briefing: Samsung expects NAND shortage in 2H07
AmTech: With yield problems an issue at Samsung, they believe industry pricing for NAND will benefit given Samsung’s 40%+ mkt share of the NAND mkt. Samsung said it expects the industry to move towards a shortage in 2H07, which bodes well for SNDK.

12 Apr 07 – Briefing: NAND prices expected to drop in May
…as DRAM prices start stabilizing – impact on SNDK and Micron- WR Hambrecht believes NAND flash pricing will drop in May with DRAM possibly stabilizing.
• Firm says G.M for SNDK could disappoint.
• Maintain “stay on the sidelines” till they see G.M stabilization and an up-tick in demand for SNDK pdts.

Believes S/T oppty in Micron shares ahead of the Samsung earnings call, as believe Samsung will announce shifting capacity back to NAND and therefore, DRAM prices beginning to stabilize.

4 Apr 07 – Bear Stearns: Stock upside exceeds downside risk
- NAND mkt recent price rebound Q inventory shortage & yield issues @mfrs. Once replenishmt completed & yields improve, prices will stabilise or drop
- NAND industry fundamentals are indeed improving in 2Q07 from ss/dd standpt
- Upside potential exceeds downside risk. Stock downside is $40 and upside is $55.

16 Feb 07 – SanDisk to Cut CEO’s Pay and Up to 10% of Staff
- world’s largest maker of flash-memory cards
- cut as much as 10% of its workforce to reduce costs as prices for its pdts decline.
- also plans to cut salaries for all execs, incl a 20% reduction in base pay for CEO

Analyst Upgrades/ Downgrades
24 Apr 07: Citigroup: upgrades to Buy from Hold and raises tgt from $44 to $52.

SeekingAlpha
- Undersupply of NAND chips in 2H07
- Will take more than one quarter to clear the channel inventory.
- Believe good Q2 bit growth and mkt share gains in NAND Flash card market. Samsung yield constraints = SNDK oppty
- Hynix royalties should +10¢ to 2007 EPS, and +24¢ in 2008
- NAND prices have bottomed and could be on the rise

.

Trade

BTO 1 x Jul 42.5 Put @$1.80 [stock price $45.15 1.20pm]

.

Result

prelim $0.19 vs $0.18 Reuters consensus, $0.17 First Call;
revs $786M vs $759.81M Reuters consensus
- sees pick-up in demand during 2H of Q2; sees pressure on margins

SanDisk beats by a penny, beats on top line; sees margin pressure
- Q1 (Mar) EPS $0.19 per share, excl non-recurring items, $0.01 better than the Reuters Ests of $0.18;
- revs rose 26.1% YoY to $786M vs $759.8M consensus.

“Q1 results reflected the current difficult market conditions,” said Eli Harari, Chairman and CEO. “In Q1 our industry experienced excess supply, sharp price declines, and depressed margins. These mkt conditions were exacerbated by weak seasonal consumer demand in retail.
Good news:
- mobile mkt largest rev generator with 27M units sold in the qtr.
- Hynix licensing agreement
- flash technology news: this week Dell announced the launch of notebook PCs that incorporates our 32GB Solid State Drive (SSD).

Looking fwd, we project a pick-up in demand during the seasonally strong back half of the 2nd qtr. H/E, excess supply and depressed pricing is expected to continue through Q2, possibly extending through the summer mths, putting pressure on our margins. Our outlook is optimistic for renewed growth heading into Q4 2007 and fwd to 2008.
Optimism based on:
- expectation of continuing penetration into multimedia handsets
- new consumer pdts eg. Sansa Connect
- lowered pdt prices

26 Apr 07 _ Briefing: SNDK Guidance
Total revs at $720-825M vs $838.2M (Reuters) $832.9M (FC).
Breakdown is $625-725M in pdt revs and $95-$100M in license and royalty revs.
Also guided non-GAAP pdt g.m. at 15-20% for Q2.

26 Apr 07 _ Briefing: SNDK Conf Call Summary
Color on low guidance “it reflects the sig growth in units and bits in our ongoing biz. But remember that is partially offset by the continued decline of the white label USB biz & elimination of Twinsys which added $53M rev in Q1. Definitely gd growth in units and bits offset by the 2 items I mentioned and also offset by the pricing decline in Q2.

CEO says “Q1 was a down qtr for SNDK and the industry as a whole. Excess supply + soft seasonal demand in retail => need for sharply lower pricing. Accordingly, we have taken pricing actions for Q2 to narrow the pricing gap ٪ us and our competitors.”

Anticipate transition to LMC will favour SNDK over competitors. Expect modest rev from MLC this yr but increase in 2008. Expect dd for Fab 3+4 to be v strong in Q4. Fab 3 is achieving exceptionally competitive cost and as long as it operated at the leading edge, and fully utilized Co believes the ROI will be v gd. Saying Q1 retail sales showed more seasonal slowdown Q/Q than last yr. NAND Flash mkt experienced structural changes could result in considerable supply shortages over next 2-3 yrs.

CEO conclusion, “In order to max L/T value creation, we believe benefit of assured low cost supply outweighs the pain of S/T imbalances such as excess inventory that inevitably materialized during industry down cycles. We are aware of our sh/holders concerns for S/T. H/E we believe we were executing the correct strategy for achieving L/T strategic goals.

26 Apr 07 _ Reuters: SanDisk posts quarterly loss
- qtrly loss amid falling prices for its main pdts.
- Q1 net loss $575K, or $0 per share, compared with YoY net income of $35.1M, or $0.17 per share.
- Rev rose 26% to $786M.
- SNDK announced in Feb plans to cut 10% of its workforce and reduce exec salaries to compensate for a collapse in prices for flash memory chips.

26 Apr 07 _ TradingMarkets: SNDK Swings To A Loss In Q1, Loss Wider Than Consensus
- swung to a loss as higher costs offset revenue growth and squeezed margins

Goldman: raised tgt from $46 to $53 based on higher royalties

SeekingAlpha: New Evidence Of Coming NAND Supply Shortage
Key factor in AAPL’s big qtr on Wed: big jump in g.m. – due in large part to a huge drop in component prices, in particular NAND Flash memory chips. But Jun qtr margins will drop because anticipate increase in NAND pricing.
Citigroup’s Craig Ellis
- on Tue raised his rating on SNDK to “Buy”, based on anticipation of firming NAND fundamentals.
- noted AAPL’s comments
- noted comments from Hynix yday: expect NAND pricing to be up 20% sequentially in Q2.
>> ARGH! this is total horseshit! given that Eli Harari had said that weakness will continue into 2nd qtr!

DigiTimes: Apple and Samsung in talks about NAND flash purchase
Samsung & AAPL have been in talks for the purchase of a volume of NAND flash, with the chips to be purchased covering those to be used in all iPods and iPhones from Jun to end-2007. Apple is asking for 400-500M 4Gbit NAND flash equivalent chips from Samsung. Since the volume requested by AAPL is 10-15% more than what the two parties agreed earlier, Samsung is not 100% sure its capacity can meet the need. Moreover, the maker is worried an oversupply for NAND flash chips may occur if the sales of AAPL’s iPod and iPhone pdts are not as strong as expected. The sources also indicated AAPL has requested that Hynix Semiconductor increases its supply of NAND flash for Q3 while Hynix also has barely enough capacity to meet AAPL’s needs.

SNDK – - 200 Day Alert
Price extends this wk’s upside momentum twds its Jan peak of 46.24 near its 200-day ma’s at 45.73/46.40 (ema/sma).

EE Times: Samsung close to losing DRAM top spot
Mkt research group Gartner Dataquest: Samsung’s lead in DRAMs has fallen to a 7 yr low, and it has responded by expanding pdn of the memories by nearly 100% this yr. Gartner warns this is threatening the industry with a yr long oversupply.

SeekingAlpha: SanDisk Blames Weak Earnings On ‘Difficult Market Conditions’
Don’t say we didn’t warn you. In addition to harping about oversupply for the last yr, we said in our earnings preview that it “Will take more than one qtr to clear the channel inventory.” In fact, SNDK’s own inventory increased $100M during the qtr, or 20%. At this rate, the Q4/2008 recovery may be too optimistic an outlook.

Digitimes: Price reduction to persist in 2Q; 56nm mass pdn on way

.

After the results________________________________

1 May 07    How SNDK stands to profit twice over
good news: revenue will increase significantly fr royalties this yr & coming yrs.
bad news: it will take another qtr or two to recover fr recent collapse in NAND prices.

dd for NAND chips – we are on verge of a quantum leap for the first time since summer of 2005 Q of new launches of advanced handsets such as the iPhone and its many imitators, (music players, video players, flash-based hdd, computer game platforms…) all of which are due to plummeting flash prices. Even the cable cos’ VOD servers will now store films on flash.

Re ss of NAND chips, CEO: altho evyone currently talking of surplus, the global mkt could soon find itself with a severe and prolonged shortage. There are presently many old fabs producing 200mm wafers, and the need to bring down pdn geometrics in order to remain competitive will make these fabs irrelevant during nxt 2 yrs cos
shortfall coming  – increase in dd Q of (i) elections (ii) Olympics

when shortfall comes, SNDK will profit twice over:
(i) as electronics co producing its own chips (not dpt on chip mfrs)
(ii) net profit will grow as chip prices skyrocket -also increased royalties as a result